Re: Public Comment on the Recommendations Regarding the Protection of Client Assets Consultation Report

Dear Mr. Ben Salem:

National Futures Association (NFA) appreciates the opportunity to comment on the IOSCO Board's Recommendations Regarding the Protection of Client Assets Consultation Report. NFA is a registered futures association under the U.S. Commodity Exchange Act (CEA) and an affiliate member of IOSCO. NFA is the industry-wide self-regulatory body for the U.S. futures industry and regulates the activities of close to 4,000 member firms and approximately 53,000 registered account executives who work for those firms. One of NFA's responsibilities is to monitor the regulatory requirements for registered futures commission merchants (FCMs). We work closely with the U.S. Commodity Futures Trading Commission (CFTC) and other self-regulatory organizations (SROs) to provide effective regulation that protects customers.

The MF Global and Peregrine Financial Group (PFG) customer losses are a painful reminder that regulators must continuously improve surveillance, examination and fraud detection techniques to keep pace with changing technology and an ever-more-complicated global financial marketplace. While we can never completely eliminate fraud, we must continue to adopt rules and surveillance techniques to try to reduce the opportunity for fraud as much as possible. NFA therefore strongly believes that the process to refine and improve regulatory protections must be ongoing and constant.

After the MF Global bankruptcy, NFA and CME Group in conjunction with the IntercontinentalExchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange announced the formation of a joint committee to review what steps SROs could take to strengthen safeguards for customer segregated funds held at the firm level. The SRO committee's most significant recommendation--one that will greatly enhance customer protection--is the confirmation by depositories of customer segregated and secured amount funds on a daily basis. The first phase of this process, which requires bank and trust company depositories to report end-of-day cash and securities balances, was fully implemented in February 2013. The second phase of this process, which will require clearinghouses and clearing FCMs to report daily the amount of funds or other collateral held on behalf of FCMs to the FCMs' DSRO, will be completed in mid-2013.

Additionally, NFA Board of Directors (Board) formed the Special Committee on the Protection of Customer Funds, comprised of NFA's public directors. The Special Committee recommended that NFA's Board adopt approval and notice requirements relating to an FCM's withdrawal of more than 25% of its residual interest not for the benefit of customers, enhance FCM financial reporting to NFA, and make certain FCM financial information fully transparent to customers via posting the information on NFA's Background Affiliation Status Information Center (BASIC) system. The Board approved the Special Committee's proposals in August 2012, and these measures have been implemented.

The Recommended Principles

We broadly support the recommended principles set out in the Report. However, we do have concerns regarding the means of implementation for Principle 5. We agree that intermediaries should advise clients that, if they trade on a board of trade outside of their home jurisdiction and their funds are held outside of their home jurisdiction, their funds will be subject to the client asset protection and/or insolvency regime of the foreign jurisdiction. We further agree that any such disclosure should be clear, concise and understandable. However, it is important to note that clients that trade outside of their home jurisdiction are overwhelmingly institutional clients. They make the independent choice to trade on those markets and, as important, have the resources to obtain independent legal advice regarding the applicable laws in such jurisdictions, and the differing asset protections those jurisdictions offer in the event an insolvency occurs.

Therefore, NFA suggests that intermediaries not be obligated to "highlight material differences [in client asset protection and/or insolvency regimes] and the potential consequences of such differences so the client can make an informed decision concerning its investment." Additionally, NFA suggests that the fourth means of implementation under principle 5 be eliminated, which requires "where the intermediary has determined there are material risks of placing client assets in a particular foreign jurisdiction and where those risks cannot be effectively mitigated by the intermediary, the intermediary should clearly and understandably disclose those risks in advance to the clients."